Universal life insurance policies build a "cash value," depending on
the amount the policyholder pays into the policy each premium period
and the fluctuating interest rate the policy earns.
Universal life insurance policies are very expensive compared to term
insurance, typically paying the broker a commission of 70-90% on the
first year's premium and as much as 5-10% on each subsequent year's
premium.
The recommendation to use universal life insurance as a college savings
vehicle arises primarily from the fact that insurance policies are not
counted as assets on the FAFSA form or as part of the Expected Family Contribution.
This leads many parents to falsely believe that an insurance policy
will help them to qualify for substantially more financial aid than
they would by using other accounts such as a Section 529 plan.
In reality, the costs (including surrender chargers) associated with a
universal life insurance policy can quickly outweigh the small gains
received in financial aid (if any).
Variable universal life insurance (VUL), which is often marketed as a
higher performing investment than standard universal life insurance,
gives the insured the opportunity to invest in stocks rather than in a
fixed rate account.
Universal Life Insurance - Definition and Overview of Universal Life Insurance
Definition: Universal life insurance is a type of permanent
life insurance that is recommended by some insurance agents as an
alternative to traditional college savings accounts.
